Leasing Equipment Versus Buying

Leasing Equipment Versus Buying

Short on cash, but need equipment? Consider leasing what you need. Leasing equipment may be a​ better alternative to​ buying, depending on your situation and​ needs.

Today, leasing is​ common practice in​ business. Over the​ past two years, equipment leasing has risen approximately 20 percent, according to​ recent research by the​ U.S. Small Business Administration (SBA). and​ 8 out of​ 10 U.S. businesses lease all or​ part of​ their equipment, reports the​ Equipment Leasing Association.

Leasing is​ appropriate for​ just about any business at​ any stage of​ development. for​ start-up businesses with no revenues, smaller leases—those of​ $100,000 or​ less—may be better managed on the​ personal credit of​ the​ owners—if they are willing to​ make the​ monthly payments.

Comparing Leasing to​ Buying When you buy a​ piece of​ equipment or​ vehicle, you usually have to​ pay for​ it​ in​ full either by using cash or​ by financing the​ balance. After you finish paying for​ it, you own it.

Equipment leasing, on the​ other hand, is​ essentially a​ loan. the​ lender buys and​ owns the​ equipment and​ then "rents" it​ to​ a​ business at​ a​ flat monthly rate for​ a​ set number of​ months. at​ the​ end of​ the​ lease, the​ business has several options. it​ can purchase the​ equipment for​ its fair market value (or a​ fixed or​ predetermined amount), continue leasing, return it​ or​ lease new equipment.

With a​ lease, you actually only pay for​ using the​ equipment. But at​ the​ end of​ the​ lease period, you could end up owning nothing. So why lease? the​ answer is​ simple: By leasing equipment, you leave money in​ the​ bank that can be used for​ other purchases. Since lease payments are usually smaller than regular loan payments, you don't have to​ pay out as​ much each month.

However, keep in​ mind that a​ lease is​ not cancelable like a​ bank loan or​ other debt. if​ you need to​ get out a​ standard loan you can sell the​ equipment and​ pay off the​ loan, or​ even refinance it. With a​ lease, you generally have to​ pay off the​ lease in​ full. So you have to​ be sure you make the​ payments when you enter into a​ lease.

So what kinds of​ equipment make the​ most sense for​ a​ small business to​ lease? According to​ research by the​ SBA, the​ most common items leased are office equipment, computers, and​ trucks and​ vehicles.

Benefits of​ Leasing Leasing equipment offers a​ wide range of​ benefits, from consistency with expenses to​ increased cash flow. But perhaps the​ most significant advantage of​ leasing is​ the​ ability to​ maintain up-to-date equipment. Leasing allows you to​ easily and​ affordably add equipment or​ upgrade to​ a​ complete new piece of​ machinery to​ meet future needs. This lets you transfer the​ risk of​ being caught with obsolete equipment to​ the​ leasing company.

Here are some other benefits of​ leasing:

• Alternative to​ financing - Leasing is​ essentially an​ alternative to​ traditional financing and​ can be great for​ companies not able to​ obtain business loans.

• 100-percent “financing” – in​ many cases, leasing requires no down payment. This allows you to​ “finance” an​ entire purchase, including software, hardware, consulting, maintenance, freight, installation, and​ training costs.

• Ease and​ convenience - Applying for​ a​ lease is​ easy, and​ lease arrangements can be structured to​ meet your individual requirements. Equipment leases can range from $ 2,000 to​ $ 2 million. for​ smaller amounts, you can complete a​ brief application and​ receive a​ final decision within days—often with no financial reports or​ tax returns needed. Leases for​ more than $100,000 generally require detailed financial information from the​ business, and​ the​ leasing company conducts a​ more thorough credit analysis than it​ would for​ a​ smaller

• Flexibility - Lease terms range from 12 to​ 60 months, depending on the​ equipment type. Most leases can be structured so that payments are made with operating rather than capital funds. This can eliminate or​ reduce capital budget delays. Leased equipment can be purchased later if​ capital becomes available. Plus, a​ percentage of​ the​ lease payments can be credited toward the​ purchase of​ the​ equipment.

• Fixed, predictable payments - Having fixed lease payments enables you to​ accurately predict the​ impact of​ equipment expenses on your cash flow.

• Conserves working capital - Leasing conserves your working capital by requiring only a​ minimum initial outlay of​ cash.

• Tax Advantages - Operating leases are generally treated as​ a​ 100-percent, tax-deductible business expense paid from pre-tax earnings instead of​ after-tax profits.

• Protection against inflation - Lease payments are based on the​ dollar's current value. and​ unlike bank lines of​ credit with fluctuating rates, your payments are fixed regardless of​ what happens to​ the​ market tomorrow, making it​ easier to​ budget, forecast and​ grow.

Working with a​ Leasing Companies When leasing equipment, keep in​ mind that the​ company selling the​ equipment simply makes a​ direct referral to​ a​ leasing company with which it​ does business. And, usually, the​ company selling the​ equipment works with more than one leasing company. So be sure to​ get quotes from a​ number of​ leasing firms. It’s also a​ good idea to​ ask for​ referrals from friends and​ business associates.

Additionally, make sure you understand with whom you’re dealing. Are you talking to​ a​ broker—the person who simply structures deals, then gets them financed through any of​ the​ leasing companies he or​ she works with. or​ are you dealing with a​ leasing company that is​ actually putting its own funds on the​ line?

Brokers can be beneficial because they have valuable insight about the​ leasing market and​ can help you find the​ best leasing solution for​ your needs. But as​ when dealing with any type of​ salesperson, you are responsible for​ handling the​ due diligence. Do your own homework to​ ensure you negotiate the​ most favorable lease agreement for​ your company.

Leasing Equipment Versus Buying

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